Tuesday, October 28, 2008

UK Amends Audit Committee Guidance; Factors for Using Multiple Audit Networks Set Out

The UK Guidance for Audit Committees (Smith Guidance) has been amended with a mixture of changes to best practices and additional disclosures to be made in the annual report. The guidance also now includes factors a company should consider when it is contemplating employing firms from more than one audit network to undertake the audit.

The guidance now encourages audit committees to consider the need to include the risk of the withdrawal of their auditor from the market in their risk evaluation and planning. Companies are also encouraged to include in the audit committee’s report information on the appointment, reappointment or removal of the auditor, including supporting information on tendering frequency, the tenure of the incumbent auditor and any contractual obligations that acted to restrict the committee’s choice of auditor.

It is common practice to appoint one firm to audit the parent group and the consolidated group accounts. This firm then uses other firms from within its international network to carry out audit work on components that are needed for group audit purposes. It is common for the same firms to carry out statutory audits of subsidiaries where these are needed.

The guidance recognizes, however, that in some circumstances it may be appropriate to use a firm from more than one audit network to achieve a high quality and cost-effective audit. The company would still appoint a single firm to audit the parent company and the group's consolidated financial statements. However, the group would agree with the group auditor that for some components the audit work that is needed for group audit purposes will be carried out by one or more firms from other networks.

In assessing the use of firms from more than one network, audit committees should consider how the group auditor will assess the independence and professional competence of the firms from other networks. Companies should also consider how the group auditor will ensure that they are familiar with the methodology of the other firms, in order to enable them to evaluate the audit evidence obtained. In addition, the guidance instructs the company to consider the arrangements the group auditor will make with different networks to ensure that they communicate effectively with each other. Finally, the company should examine the overall costs and benefits associated with using firms from more than one network, as well as what costs will be attached to the group auditor assessing firms from other networks, evaluating audit evidence obtained by them, and
addressing any issues.